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Disclosing conflict of interest : does experience and reputation matter?

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  • Koch, Christopher
  • Schmidt, Carsten

Abstract

Disclosure of conflict of interest is currently seen as an effective tool for reducing threats to auditor independence. Cain, Loewenstein, and Moore (2005) provide evidence for perverse effects of disclosing conflict of interest. Using a controlled laboratory experiment, we replicate their finding that such a disclosure can cause an impairment of auditor independence. However, as subjects gain experience we find that these results revert and auditors give less biased advice. Our results imply that the perverse effects noted in the literature might be an artifact of an environment with inexperienced subjects and of less relevance for the audit environment where main actors are experienced. To the contrary, disclosure of conflict of interest can even improve auditor independence by fostering fairness. Furthermore, we find that disclosure of conflict of interests disturbs reputation building.

Suggested Citation

  • Koch, Christopher & Schmidt, Carsten, 2006. "Disclosing conflict of interest : does experience and reputation matter?," Papers 06-10, Sonderforschungsbreich 504.
    • Handle: RePEc:mnh:spaper:2580
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    File URL: https://madoc.bib.uni-mannheim.de/2580/1/dp06_10.pdf
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    1. Davis, Douglas D. & Holt, Charles a., 1993. "Experimental economics: Methods, problems and promise," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 8(2), pages 179-212.
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    2. George Loewenstein & Daylian M. Cain & Sunita Sah, 2011. "The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest," American Economic Review, American Economic Association, vol. 101(3), pages 423-428, May.
    3. Ismayilov, Huseyn & Potters, Jan, 2013. "Disclosing advisor's interests neither hurts nor helps," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 314-320.

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    Keywords

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    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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